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CFP Board tightens rules for fee-only planners

When its new standards of conduct take effect in October, the CFP Board is expecting fee-only advisors to abide by a more rigorous framework for disclosing and managing conflicts of interest.

To be sure, the CFP Board already holds advisors to a fiduciary standard, and it acknowledges that many of the provisions for fee-only advisors will remain consistent when the new standards take effect.

Nevertheless, the board is billing the enactment of its new standards as a "milestone event" that will usher in a more expansive set of fiduciary responsibilities for advisors who hold the CFP credential. To help ease the transition, the board has been holding numerous outreach events, and this week has published guidance to help fee-only advisors interpret how the new standards will affect their practice and compliance programs.

The new standards aim to provide greater detail and clarity around compensation models. They stipulate, for instance, that CFP holders may only describe their practice as fee-only if their firm and related parties don't receive any sales-related compensation in connection with the advisory services the firm provides to clients.

Photo by Scott Wenger

The CFP Board also encourages advisors to closely consult its standards for the definitions of operative terms such as "sales-related compensation," which it defines as including both commissions and other incentive-driven compensation.

CFP Board CEO Kevin Keller hails the new standards as an effort to elevate the conduct of all CFP holders, who work in a variety of business models subject to varying federal and state regulations.

"The cornerstone of the new Code and Standards is the requirement that all CFP professionals act as a fiduciary at all times when providing financial advice to a client," he said in a statement.

"At the same time,” Keller continued, “the new Code and Standards have specific implications for 'fee-only' CFP professionals. This new document provides them the guidance they need to work on a 'fee-only' basis and stay true to the new rules."

Fee-only advisors are sometimes seen as operating with less of a structural conflict of interest than brokers or other advisors who earn commissions, which can vary from one product to another. In that model, the advisor might have the incentive to engage in excessive trading activity or favor a specific investment vehicle that will net the largest commission or fee.

But the CFP Board notes that no business model is conflict-free, and fee-only advisors have a specific set of conflicts that they must disclose and manage under the new guidelines.

So, for instance, when an advisor receives compensation based on a percentage of assets under management, the CFP Board observes that the interests of the CFP and their client are at odds when the client is considering moving money to investments that the advisor doesn't manage or drawing down on advisory accounts to pay down debt.

In both cases, Keller says, "the financial advice may reduce the value of assets under management, and thus, the fee that the CFP professional earns for providing financial advice," creating a conflict that the advisor must manage and disclose.

Likewise, the board's new guidance cautions advisors who charge hourly fees to be mindful of the potential to overbill.

"The CFP professional needs to exercise due care in determining the amount of time necessary to complete the work and charge the client only for the time spent providing professional services," the board's new guidance states.

"Professional services" is another term the board recommends planners consult with its standards, where it is defined as financial advice and services including financial planning, legal, accounting or business planning services.

The guidance also offers some basic clarifications about when the fiduciary duty will be triggered for all CFPs under the new standards. As a starting point, the CFP Board offers a checklist outlining what activities constitute financial advice, the fiduciary threshold under the standards.

So generic marketing materials and basic client education materials would not rise to the level of financial advice, but any communication that "would reasonably be viewed as a recommendation that the client" take a certain financial action would be.

"The more individually tailored the communication is to the client," the board writes, "the more likely the communication will be viewed as financial advice."

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